In the world of financial planning and investments, there are many avenues to be considered. The primary aim of financial planning is to create a corpus of funds that a person can use after his productive years are over. This can be done by either choosing investment instruments that will give a secured rate of return with no uncertainties or choosing options which will earn higher rate of return coupled with market risks. While the latter class of investment options will prevent inflation from eating into the value of corpus in the coming years, the former class will assure a guaranteed amount, no matter what the economic scenario in the country.
A right combination of both the classes of investments is necessary to meet the financial goals of any person’s life. What are these financial goals? They can be ensuring financial safety and continuation of the same standard of living for the family even in the event of demise or disability of the principal bread earner, to avail of the best medical care, to provide for higher education and wedding of an offspring, and finally to save enough for retirement so as to be able to live off these savings comfortably.
Insurance, as you might have gleaned from the discussion above, is a very important part of this financial plan. It is the only way through which you can protect yourself and your family members against the risks like loss of life, permanent disability, prolonged illness, loss of income etc. That means you must plan on buying adequate insurance. But, you would immediately feel daunted by questions like which one to buy out of so many plans in the market? What is the cost-benefit ratio? Which one is the best for my needs? So, let’s address these questions here.
Life insurance plans are essentially of two types – endowment policies and term policies.
Endowment policies are a combination of insurance and investment. Under these policies, the buyer is assured against loss of life, disability and resulting loss of income. In addition to this assurance, endowment policies create a fund that is derived from regular investments made on behalf of the assured out of the premiums paid by him.
The amount so invested and the interest earned on this investment are paid to the assured at the end of the policy as survival benefit. Premiums for these policies are higher because of complexities of managing investments and also due to various factors such as surrender value, loan against the policy etc.
Term insurance operates on principles of pure insurance. While being simple and low cost, it is a very effectual mode of insurance wherein the assured person is covered against the risks of mortality. The premium depends upon the sum assured and age of the assured person. Premiums under term insurance policies are nominal. Younger the person, lower the premium because the insurance company perceives the risk of mortality i.e. death of a young and healthy person to be very less.
If the assured dies during the term of the policy, which is generally anywhere between 10 to 30 years, the beneficiary of the policy gets the entire sum assured as death benefit. The beneficiary can be anyone from the assureds’ family, generally wife or dependent child.
If nothing happens to the assured during the term of the policy, then the policy comes to an end at its stipulated period and the risk cover stops. As there is no further benefit involved, the assured gets nothing at the end of the policy. However, he has the option of extending the insurance cover at any time during the term of the policy.
If he chooses to extend the term of the policy, he would have to pay premiums, which will be altered and often, would be a little higher than earlier according to his age at the time and his impending insurance needs. But exercising this option while the policy is still functional makes sense because if you wait for the policy to end, which normally happens when you are already in your retirement years, you may either be denied the renewal or extension altogether, or may have to pay very steep premiums - and that may not be a smart financial move.
Term insurance doesn’t provide options like surrender value or loan against the accrued cash value. It adopts a straightforward and cost-effective approach of granting security against the payment of premiums at very nominal rates. This makes it quite an attractive strategy to secure the financial future of your family. We will look into some of the benefits of Term Insurance plan in the following points:
1. Very simple to understand:
All you have to do is decide the sum assured and the term of insurance cover you want to opt for. There aren’t any other complicated terminologies or provisions to understand.
2. A truly low cost- high benefit alternative:
As the premiums are relatively smaller even for a bigger sum assured, term Life insurance tends to be affordable to all.
3. Very important for households who depend on principle or sole breadwinner:
In the unfortunate demise of this person, the entire family may be crippled financially. Term insurance policy gives them a tool to meet their major financial obligations with little worry.
4. Convertible into whole life with a little incremental cost:
This option of convertibility can be exercised by the assured, who wish to switch to an endowment policy and create a savings fund while keeping their risk cover intact.
5. Return of premiums:
There are some variations of the standard term policy. With slightly higher premiums, the provision of return of all premiums at the maturity of the policy can be availed of. Thus, if the assured outlives the policy, he at least gets back what he paid to the insurance company.
6. Income tax benefits:
The premium payment for term insurance is deductible under Sec 80(C) of Income Tax Act and the death benefit is exempt from tax under Sec 10(10D). Thus, by buying a term insurance policy, the assured can plan his tax obligation and in the event of his death, his dependents get the money tax free.
7. Exploring other, more profitable investment alternatives:
This can be done by sophisticated investors with higher risk appetite. Rather than locking in higher amounts of premium towards endowment policy, which provides returns at a moderate rate, they prefer to invest in market related instruments like debt, equity, mutual funds. Term insurance assures them of the financial safety of their family at minimum possible cost.
8. Options to renew and extend the coverage as well as to add various riders:
The person seeking to buy term insurance can modify the terms to suit his requirements like adding specific riders that cover the risk of permanent disability or prolonged illness. This can be done at the time of buying the policy. The risk cover under the policy can also be furthered by extending the term either during the tenure of the policy or at the time of its expiry. In both the cases, the insurance company will charge higher premiums depending upon the stature in life and insurance needs of the assured.
Given all these well-assessed benefits of Term Life insurance, you can handsomely plan and secure the financial future of your loved ones.
